Bailout Barometer for the State-owned Indian Banks

The risks created by explicit and implicit government guarantees for state-owned financial entities are often quite sizeable. Taking this consideration on board, the Federal Reserve Bank of Richmond has been providing an estimate of the magnitude of financial system liabilities that are guaranteed by the federal government (Marshall et al 2017). This esti­mate—termed as the bailout barometer—provides an assessment of how much of the financial system assets are explicitly or implicitly protected from losses by the government. The estimate for any year is based on the figures, as obtained at the end of the preceding year. The first such estimates made in 1999 showed that, roughly, 45% of the financial firm liabilities were protected. By 2017, this number had shot up to 60% of the total financial firm liabilities. This includes the protection provided, not only to banking and savings firms, but also to credit unions and government-sponsored enterprises (for example, Fannie Mae and Freddie Mac) as well as other pension funds. Of this, banking and savings entities accounted for roughly 35% of the total liabilities.

In this article, we pursue the aforementioned idea and estimate the bailout barometer in the Indian context. More specifically, akin to Marshall et al (2017), we estimate the bailout barometer for the Indian state-owned banks. While there are several other institutions that are also majority owned by the government, banks are by far the most important set of financial institutions with their asset comprising, on average, aro­und 80% of the gross domestic product (GDP) during the post-2008 crisis period.¹ Within this cate­gory, the state-owned banks are powerful vehicles of economic growth acting as conduits for government policies and progra­mmes. Repeated capitalisation of these banks over the past two decades also underscores their key importance in the Indian financial space. In particular, we address three interrelated questions: First, what is the size of the bailout baro­meter for the Indian state-owned banks? Second and relatedly, what is the quantum of the explicitly and implicitly guaranteed liabilities? and finally, how does this magnitude vary by size, interconnectedness, and systemic importance? To the best of our knowledge, this is presumably the first attempt at an ana­lytical assessment in the Indian context.